No oil boom in Illinois, but producers focusing on idle wells

Saturday

Apr 26, 2008 at 12:01 AMApr 26, 2008 at 5:02 AM

The oil sheiks of Saudi Arabia and Dubai may be living a lifestyle forged from a plentiful supply of high-priced oil, but don’t expect Illinois oil producers to start building palaces and spending millions on racehorses.

Chris Dettro

The oil sheiks of Saudi Arabia and Dubai may be living a lifestyle forged from a plentiful supply of high-priced oil, but don’t expect Illinois oil producers to start building palaces and spending millions on racehorses.

“We’re doing well, but there is no oil boom in Illinois,” said Brad Richards, executive vice president of the Mount Vernon-based Illinois Oil and Gas Association.

But will the recent spike in prices result in some idle wells starting up again?

“We hope so,” Richards said.

For starters, 98 percent or more of Illinois 23,000 to 24,000 active wells — most of them in southeastern Illinois — are classified as economically marginal, or “stripper wells,” producing less than 10 barrels of oil per day.

“We have very mature production,” Richards said. “Many of our Illinois Basin wells were drilled in the 1930s and 1940s, and oil production peaked at 400,000 barrels a day in the ’40s.

“Since then, we’ve been declining to the current rate of about 30,000 barrels a day.”

Average production of an Illinois well is 1.25 barrels per day, he said.

“A good well produces five to six barrels of oil a day,” he said. “There are an awful lot that produce less than a barrel a day.”

The average price per barrel in Illinois last year was between $62 and $63, yet production declined by 4.5 percent, Richards said.

“I think there’ll be more activity, but it’s slow to get started,” said Craig Howard, an engineer who heads Howard Energy, a Mount Carmel oil producer.

“I believe we’ll see some wells start up again, but they’ve been idle so long, ownership now is the question,” he said. “The leases may have to be renewed.

“All of us are looking to see what’s out there and what’s available. There are people wanting to do some things.”

And while higher oil prices “give us a chance to stabilize and expand a little bit,” producers now worry about a proposal to take away some of their revenue.

The state Department of Natural Resources has proposed a 5 percent fee on gross revenue from oil and gas production to pay for regulatory programs.

But Richards, whose 400-member group opposes the idea, said that at last year’s prices, the fee would have generated $33 million, and at this year’s prices, $50 million.

He said DNR’s division of oil and gas, which regulates the industry, has an annual budget of about $2 million, and half that is paid by the industry through an existing fee.

Richards said DNR indicated the 5 percent fee — he calls it a tax — would put Illinois at the national average for such fees. “But most states exempt marginal wells,” he said.

Illinois also is near the top in oil well operational costs, much higher than in Oklahoma and Texas, for example, he said.

Richards said all the major oil companies, such as Marathon, Texaco and others, used to operate in Illinois.

“They all left town a long time ago,” he said. “Why? Because the easy oil was gone, the cheap-to-produce oil was gone.”

What’s left are for the most part locally owned small businesses that keep their profits at home.

“At $30, $40, $50 a barrel, it’s not economical to operate these wells,” Richards said. “We need higher prices in order to survive.”

In 1999, the oil price in Illinois was $8.50 a barrel. Now, it is roughly around $110 — generally $8.25 less than the price on the New York Mercantile Exchange.

Oil producers in Illinois have to go after smaller and smaller reserves and use secondary recovery methods, which involve injecting water to sweep oil from the ground.

“The next phase, if there is going to be one, will be tertiary oil recovery,” Richards said.

One Lawrence County producer is using this method, which applies chemicals to more efficiently sweep oil from the rock.

“But it’s very expensive,” Richards said.

He thinks the higher oil prices will result in more drilling, but Howard isn’t so sure.

“There is a problem finding prospects that are worth drilling, and landowners aren’t as willing to lease,” Howard said. “It’s difficult to find a prospect to drill right now.”

In 1981, there were 140 drilling rigs operating in Illinois, he said. That figure is down to 25 now.

Producers in southeastern Illinois also haven’t taken full advantage of rising prices because flooding in the region has coincided with the recent spike in price. That shut down some production.

“I’m just now getting back into some leases for the first time since January,” Howard said.

Despite the problems, Richards prefers the current climate to that of the 1990s.

“The business cycle is now such that small operators can make money,” he said. “And it is a cyclical business. If not for the occasional good times, there would be no reason to stick around through the bad times.”